United States

Indiana: Sales Not Thrown Back When Subsidiary Taxable in Foreign Countries

Sep 11, 2017
From KPMG TaxWatch

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In a recent Letter of Findings, the Department of Revenue addressed whether a taxpayer was able to avoid throwback because its foreign IP Subsidiary was subject to tax in foreign jurisdictions where the taxpayer made sales of tangible personal property. In a prior audit, the Department required the taxpayer to include in its Indiana return royalty income from the foreign IP Subsidiary that licensed the taxpayer's intellectual property to foreign affiliates. The foreign royalty income was also included in the taxpayer’s Indiana sales factor denominator. In this particular situation, the taxpayer argued that it should not have to throw back to Indiana receipts from sales attributable to foreign countries where its affiliate’s activities exceeded P.L. 86-272.

The Department noted that Indiana is not a mandatory combined reporting state and therefore does not generally apply the so-called Finnigan concept (other than to those companies that file unitary combined returns in Indiana). However, in the instant case the Department determined that application Finnigan was appropriate as a matter of equity. Specifically, by allocating the royalty income to the taxpayer, the Department's prior audit implicitly considered that the subsidiary’s nexus could be attributable to the taxpayer. Therefore, for purposes of computing the taxpayer’s sales factor for the tax year at issue, the Department agreed to apply Finnigan and consider the foreign IP subsidiary's nexus in determining where the taxpayer's income from foreign jurisdictions should be sourced. However, the Department ultimately determined that the taxpayer had only provided adequate documentation to support its position in eight of the forty-two countries where it had made sales. Please contact Marc Caito at 317-951-2434 with questions on this Letter of Findings. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.